(In GM-speak, those plants aren’t closing, they are being “unallocated.” The layoffs are a “staffing transformation.”)

So, GM management just did what some investors think management should do: maximize shareholder value. But what took away their other choices?

Part of it was long-term consumer trends. The cuts focused on passenger car production, which has been declining as Americans buy more trucks and SUVs. But that’s nothing new.

President Trump’s steel tariffs are new and reportedly raising GM’s costs up to a billion dollars annually. Hence the need to unallocate plants and transform staff.

(The latest meeting didn’t change those tariffs, by the way. They remain in effect.)

However, we can’t place all the blame on Trump. Congress helped too.

Last year’s “Tax Cuts and Jobs Act” was long on tax cuts and short on jobs. Its hastily drawn provisions include one called GILTI that can reward US companies for moving production overseas. In certain situations, they pay a lower US tax rate than they would by making the same goods in the US and exporting them.

That was not the intent, I presume, but it happened. And politics being so gridlocked, we don’t know when a new Congress will fix the problem. Meanwhile, GM and others have a tax incentive to kill American jobs.

Photo: AP

Chinese Customers

Other and bigger things are happening.

Industrial technology is pushing production closer to consumers by making international wage differences less important. Unlike people, robots cost about the same everywhere, so businesses are better off building factories near the people who buy whatever they make.

For GM and other auto manufacturers, the customers are increasingly foreign. In this year’s third quarter, GM sold 835,934 cars in China and 694,638 in the US. It built many of those directly in China and has every reason to make more there, tariffs or not. Ditto for the entire automotive industry.

That’s not what President Trump wants, of course. He wants them to build cars in the US and ship them to China. The US will then, he thinks, become a manufacturing powerhouse again and the much-hated trade deficit will shrink.

That’s the theory. Unfortunately, his tariffs help convince the car makers to do the opposite, as does the GILTI tax. And even without those, shorter supply chains are making that kind of exporting uncompetitive.

Like it or not, the world is changing. Those manufacturing jobs are not coming back to the US. But that doesn’t mean the tariffs have no impact.

President Donald Trump’s tariffs on Chinese imports are having the desired effect of driving production out of China – but not to the United States.

Less than a month after the Trump administration hit US$200 billion worth of Chinese imports with a 10 per cent tariff, leading Hong Kong based furniture maker Man Wah Holdings – which has more than 18 million square feet of manufacturing space in China – broke ground on an expansion of its facility outside Ho Chi Minh City in Vietnam.

In June the company, which specialises in reclining chairs and sofas that have become a fixture in middle-class American living rooms, bought what was already one of Vietnam’s largest furniture factories. By next year, it will be the biggest.

Chinese manufacturers are moving tariffs to places like Vietnam where costs are lower and US tariffs not (yet) applied. Good news for Vietnam, obviously, but also for the Chinese companies and government. Chinese workers? Not so much.

US consumers, meanwhile, will stay mostly oblivious to the national origin of their purchases. Most won’t care if a product comes from Vietnam instead of China as long as price and quality stay the same.

A study by World Bank economist Massimiliano Calì estimated Vietnam’s GDP will grow 4.4% if it replaces all the Chinese exports on products it already produces, with the Philippines and Cambodia benefiting as well.

How does that help American workers? It doesn’t. It hurts them. A separate study (funded by Koch Industries, so not a left-wing source) estimates trade policy will cost the US economy $915 per person in 2019 alone, reducing GDP by 1.78 percentage points.

That’s next year, not way out in the future. The damage is happening now.

As I noted last week, much of this damage is already locked in. Companies have built inventory ahead of the now-postponed 25% tariffs on many Chinese goods. At some point, they have to stop buying and sell down that inventory.

So it’s good that Presidents Trump and Xi agreed to negotiate further, but their public statements don’t suggest either side will give up much. They have deep, structural differences.

But the bigger trend won’t change. Globalization is slowly reversing, and no one can stop it. We should try to minimize the pain. Instead, we’re adding to it.

Senior Economic Analyst Patrick Watson is a master in connecting the dots and finding out where budding trends are leading. Patrick has partnered with John Mauldin as the co-editor of Mauldin Economics’ premium research service, Over My Shoulder. Together, they curate research and analysis from the world’s finest thinkers, and deliver it to subscribers 3–4 times per week. You can also follow him on Twitter (@PatrickW) to see his commentary on current events.

Discuss This

Comments

mwgjerde@gmail.com

Great Article Patrick! A very clear list of what has already gone wrong and what more will happen if you are paying attention.

Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms & Conditions of Use.

Unauthorized Disclosure Prohibited

The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use as a subscriber. Mauldin Economics reserves all rights to the content of this publication and related materials. Forwarding, copying, disseminating, or distributing this report in whole or in part, including substantial quotation of any portion the publication or any release of specific investment recommendations, is strictly prohibited.
Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved at Mauldin Economics’ sole discretion, may violate the copyright laws of the United States, and may subject the violator to legal prosecution. Mauldin Economics reserves the right to monitor the use of this publication without disclosure by any electronic means it deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended subscriber, please contact service@mauldineconomics.com.

Disclaimers

The Mauldin Economics website, Thoughts from the Frontline, The Weekly Profit, The 10th Man, Connecting the Dots, Transformational Technology Digest, Over My Shoulder, Yield Shark, Transformational Technology Alert, Rational Bear, Street Freak, ETF 20/20, In the Money, and Mauldin Economics VIP are published by Mauldin Economics, LLC Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.
John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion.
Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Mauldin Economics publication or website, any infringement or misappropriation of Mauldin Economics, LLC’s proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

Affiliate Notice

Mauldin Economics has affiliate agreements in place that may include fee sharing. If you have a website or newsletter and would like to be considered for inclusion in the Mauldin Economics affiliate program, please go to http://affiliates.ggcpublishing.com/. Likewise, from time to time Mauldin Economics may engage in affiliate programs offered by other companies, though corporate policy firmly dictates that such agreements will have no influence on any product or service recommendations, nor alter the pricing that would otherwise be available in absence of such an agreement. As always, it is important that you do your own due diligence before transacting any business with any firm, for any product or service.